Conoco’s Timor tax dispute in arbitration

ConocoPhillips has launched an international arbitration process over its tax dispute with the East Timorese government, signalling a resolution to the issue allowing it to consider further investment in the region is still far off.

The escalation of the dispute, which has been brewing for months, comes just ahead of an important deadline for an agreement to be reached between the Sunrise gas venture, in which Conoco has a stake, and the Australian and East Timorese governments over how to develop the Sunrise field.

East Timor’s finance minister Emilia Pires has said that oil companies operating in its waters owe several million dollars in back taxes. Most of the claims involve the Bayu-Undan gas venture run by Conoco, which has dismissed the claims.

Conoco has said that there are no unpaid taxes.

A Conoco spokesman told The Australian Financial Review that Conoco had some challenges to the East Timor government’s assessments of its taxes before a court in Dili. It believes the assessments are contrary to either Timor-Leste’s own tax laws, its production sharing contracts with Timor-Leste and Australia, or other agreements and treaties.

The US company subsequently initiated an international arbitration process for the dispute.

“They are working through the process slowly," the spokesman said.

The arbitration process is understood to be at an early stage, with the selection process of the arbitrators that will act for each side still under way.

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Conoco warned in October that it may hold off any further investment in East Timor because the dispute showed it was unable to rely on the sanctity of agreements with the government.

The US company is still of that view, the spokesman said this week.

“Clearly when there are issues that seem to be against what has previously been written into contracts or treaties it shakes one’s confidence in investment certainty," he said.

Under the treaty between East Timor and Australia on the Sunrise gas resource, the parties need to agree on a development concept for the project by February 23, 2013, or the treaty could lapse, opening the door to a maritime boundary dispute.

But the East Timorese remain staunchly in favour of developing Sunrise through an onshore LNG plant on its soil, while the Woodside Petroleum-led Sunrise venture wants to build a floating LNG project.

While the Conoco spokesman said the tax dispute was not necessarily related to the Sunrise issue, a consensus on the project appears even more unlikely to be reached while it remains unresolved.